Public Deposits

Meaning of Public Deposits

Companies can raise funds by inviting their shareholders, employees and the general public to deposit their savings with the company at higher rate of interest than the interest on bank deposit. The period for which companies accept public deposits ranges between six months to 36 months.

Merits of Public Deposits

1. Simple and easy:

The method of borrowing money through public deposit is very simple, Instead of long legal formalities, advertisement in the newspapers is to be given and a receipt for the deposit is to be issued to the depositor.

2. No charge on assets:

Public deposits are not secured as they do not have any charge on the fixed assets of the company.

3. Economical:

Expenses incurred on borrowing through public deposits are much less than expenses of other methods like issue of shares and debentures.

4. Flexibility:

Public deposits are flexible source as these can be raised when needed and refunded when not required.

Limitations of Public Deposits

1. Uncertainty:

Only highly reputed companies can use Public deposits for funds. There may be sudden withdrawals of deposits, which may create financial problems. These are regarded as fair weather friend.

2. Insecurity:

Public deposits do not have any charge on the assets of the concern. On the part of depositors, it may not always be safe to deposit savings with companies particularly those, which are not very sound financially.

3. Limits on the amount raised:

There are limits on the amount that can be raised through public deposits.